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Trent: Lower taxes to the rescue - Views on News from Equitymaster

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Trent: Lower taxes to the rescue

Jun 18, 2009

Performance summary
  • Reports flat sales on a standalone basis during FY09, while consolidated revenues are higher by 18% YoY. Slowing economic growth impacts lifestyle retailing business of the company.
  • Increased cost of operations dents operating margins.
  • Compared to the 63% YoY decrease in operating profits on a standalone basis, decline in bottomline is lower at 19% YoY. Higher other income and lower taxes restrict the fall in net profits.
  • On a consolidated basis, net profits are down by 97% YoY. Apart from the gloomy environment, the profits are lower on account of incubation of the Hypermarket business.
  • The company opened 8 Westside stores, two Sisley stores and one Fashion Yatra store during the quarter taking the total number of Westside stores to 36 and the total number of stores under various formats to 42.
  • With effect from 1st August, 2008 the company transferred its Star Bazaar business as a going concern to its 100% subsidiary Trent Hypermarket Ltd. Hence, performance is not truly comparable on a year on year basis.
  • The company recommends a dividend of Rs 5.5 per equity share. The same translates into a dividend yield of 1.1%.

Financial performance snapshot
  Standalone Consolidated
(Rs m) FY08 FY09 Change FY08 FY09 Change
Net sales 5,157 5,140 -0.3% 7,180 8,497 18.3%
Expenditure 4,989 5,078 1.8% 6,909 8,591 24.4%
Operating profit (EBDITA) 167 62 -62.8% 271 (94)  
EBDITA margin (%) 3.2% 1.2%   3.8% -1.1%  
Other income 308 326 6.0% 372 355 -4.5%
Interest 13 13 -0.2% 105 96 -8.8%
Depreciation & amortisation 89 92 4.3% 125 159 27.4%
Profit before tax 373 283 -24.2% 413 6 -98.7%
Tax 45 15 -65.9% 72 3 -95.4%
Minority Share of Profit (Loss) - -   (3) 1 -118.8%
Pre-acquisition Profit (Loss) - -   (1) 8 -1612.0%
Profit after tax 329 268 -18.6% 336 10 -96.9%
Net profit margin (%) 6.4% 5.2%   4.7% 0.1%  
No. of shares (m) 19.5 19.5        
Diluted earnings per share (Rs)*   13.7        
P/E (x)   36.9        
(*trailing twelve month earnings)

What has driven performance in FY09?
  • Trent reported a marginal decline of 0.3% YoY in the standalone topline during FY09. While the exact reason for the same is not known, FY09 has been a tough year for retail players. Slowing economic growth impacted disposable income in the hands of the people, which affected consumption. The second half of the fiscal was particularly bad for the company as footfalls were lower on account of terror attacks witnessed in Mumbai in November 2008 and closure of one store in 3QFY09 due to a fire in the mall where the store was located. Thus, despite being a festive season, gloomy economic conditions triggered a cautious approach towards spending and this hurt the retail industry’s growth.

  • Operating profits declined by 63% YoY on a standalone basis as costs grew at a faster rate as compared to the topline. The costs were on the higher side on account of expansion plans. New store openings resulted in an increase in employee costs, higher inventory on books, higher spend towards advertising and promotional activities and power costs in order to run the stores. Thus, all the cost heads (as a percentage of sales) witnessed a rise during the year resulting in the 2% contraction in EBITDA margins.

  • Net profits on a standalone basis declined by 19% YoY. The fall in bottomline was lower as compared to that of the operating profits on account of higher other income and lower taxes. The profit before tax (PBT) also declined by 24% YoY. If one excludes the other income, the company reported a loss of Rs 43 m before adjusting for tax outgo.

What to expect?
At the current price of Rs 505, the stock is trading at a price to earnings multiple of 36.9 its trailing twelve month earnings. Given that the management is focused on the strategy of setting up new stores and is looking at other related retail initiatives, the long-term growth prospects of the company look promising. However, scaling up its retail space may not translate into higher earnings in the near to medium term. The economic slowdown is likely to continue impacting footfalls and hence volume offtakes. Considering the economic scenario and the company’s dependence on income other than its retailing business, investors should practice caution while investing in the stock.

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Mar 20, 2019 (Close)


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